Monday, October 20, 2008

Great skype comment in a conversation with my friend Tonho :

I am crazy for science ... I think it is the only exit for be a more happy person (talking about you advice " make sure you cultivate the CHILDLIKE SENSE OF CURIOSITY AND WONDER ABOUT NATURE. Children have an isatiable curiosity about everything around them. Sights, sounds, and smell are a constant source of wonder and amazement...the are eager to learn about plants, birds and insects and are always trying all sorts of experiments with straws, bottles, mud, and love take apart a watch or mecancal toy to see what is inside and how it works. A scientist, Phil is a person who retains some of this childlike sense of curiosity and wonder about nature...and neurons.

Friday, October 10, 2008

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''

The cry goes up in the markets : "Help! Mr. Government! Save us from ourselves"

Remember, the reality is that markets have never been anything but the junior partners to political power. People who tell you otherwise are trying to fool you into not exercising that power.

Nah. I think it's just you who's getting bogged down in the minutiae. :-)

But good comments, though ...

My thoughts :

1) No one thinks speculation is a good idea. People have always been against it. The problem with speculation is that there's *no* principled way to distinguish it from use of the market in the "right" way.

In both cases people buy now, hoping to sell later for a profit. In both cases people look to the behavior of those around them to learn about the world. (The whole point of a market is that aggregates information publicly, so you can't distinguish "speculators" from "honest investors" by whether they base their judgment on prices.)

"Speculation" can be suspected when prices are increasing rapidly. But there can usually be a plausible story told about why prices *should* be rising rapidly this time. (Eg. the internet changes everything.)

Then speculation is only widely acknowledged *later* when there's a crash and people realize that the prices were "wrong". (By which time, by definition, you've admitted that it's possible for there to be difference between the market price and the "reality")

2) You could *assume* that the "speculators" were the high-frequency (day-traders) and try to filter out the high-frequency movements (ie. by forcing a minimal holding time; or by, say, imposing a tax on purchases which reduces the viability of frequent trades for small gains.)

What you're up against here is a) whether the high-frequency signal really *is* the speculation. And b) whether the market loses certain flexibilities by filtering out the higher frequencies.

As I understand it, the market seems to exhibit "drunkards walk" properties (ie. random at all frequencies). The only real "trend" is a steady, underlying increase in share prices. But I suspect that tells us very little about the world and mainly tracks the increase in the money supply, so it's just a kind of inflation. [Update : See update at end of for me pulling back from this claim.]

As an aside, remember that when people talk about the stock-market "outperforming" the rate of inflation, it's nonsense. Shares are a "good" just like anything else. If their price is increasing, that's inflation. All "outperforming" means is that they're increasing at a faster rate than salaries, goods, services and the rest of the economy. In other words, the government is increasing the money supply and the capitalist class is grabbing an increasingly large proportion of it.

3)

Oli:

the current financial crisis has partly arisen because not enough theoretical work has been done on the manner of these feedback loops and therefore the kind of system dampening that is required to prevent wildly destructive effects.

At this point I realise that I should read more before pondering more, but Phil, is this the kind of thing that you've been exploring with your OPTIMAES project?

During the 20th century economics has focussed on a particular kind of mathematical model : ie. analytic treatment of equilibria. Only recently has the mainstream starting moving away from this to think about other kinds of models (informational ones, agent based ones, cybernetic ones.)

I'm particularly interested in looking at markets from a cybernetics / dynamical systems perspective. There's a rather fascinating underground current of thinking in the 20th century which is agreeably "left wing" and holistic, one that seems to encompass cybernetics, a more liberal organization theory, some psychoanalysis, spirituality, alt.money etc. (Think Stafford Beer or Francisco Varela)

What distinguishes this tradition from mainstream economic theory - which is far more game theoretical, methodologically individualist and appealing to the right - is a belief in feedback, non-linearity and emergence (not just of order but also emergent catastrophic events). I think that economic thinking needs (and is going to get) its next breakthroughs in understanding from this cybernetic / dynamical systems tradition. And the method of discovery will be computer simulation. So, of course, OPTIMAES is all about this :-)

Update : there's an interesting diversion on the comments where I'm discussing the long term trend of share-prices rising. I hypothesized above that this may just be in line with the growth of the money supply. In fact, Darius later convinced me that shares can rise in line with growth of goods and services rather than purely inflation due to the money supply increasing. (I guess I was running with a sort of gold-bug prejudice that I picked up somewhere.) So, ok, I pull back from that earlier suggestion.

Saturday, October 04, 2008

Two lessons I'm taking from current world financial crisis and US government bailout.

1) US-style capitalism doesn't work without government involvement. As Ayn Rand once put it, real capitalism is an unknown ideal. Who knows how ideal it is? Certainly not the US, which offers us no evidence, one way or the other.

2) Markets "don't know nuffink". Seriously, all the arguments about mark-to-market etc. reveal that these grand distributed information processing machines are pure fraud. What exactly is the worth of XYZ asset? Well, we don't know. We must stop mark-to-market because what the market is telling us is "wrong". That's why we must pump more money in, to convince the market to "know" something else about the value of these things.

Yeah, right.

Markets do not discover the "correct" value of things. We've just let free-market ideologues paint us into an epistemological corner where we assume whatever the market tells us is the correct value. Except when a crisis comes along, like today, and the result is so painful that we try to convince markets of something else.

The crisis is not because the price is too high or too low. The crisis is because markets are too volatile to be relied on as generators of knowledge. The world didn't dramatically change between the pre-crisis and now. The knowledge of the world which is incorporated in markets didn't dramatically change either. What dramatically changed were the expectations of how other agents in the market would behave. In other words, the dramatic re-valuation of assets reflects only endogenous feedback loops inside the market, not an epistemic process responsible for enabling beliefs to reliably track the world.

Now we realize that such a mechanism for generating accurate knowledge about the world barely exists. The information gathering function of the market is swamped by the "betting on other agents' behaviours" part.

Of course, none of this will stop the hypocrites who will pocket their government hand-out and go back to selling us the idea that the market is the best information aggregator that exists.

Everyone around the world is waiting on tenterhooks to see whether the US Congress decides to bail out the US Financial system. And, if so, will that save the US's role of consumer of last resort to keep the whole world trade system going.

I wonder why Lula doesn't just pick up the phone, call his opposites in China, India etc. and say "Tell you what. All that stuff you want to make, but can't sell to the US anymore. We'll have it. We're cutting import taxes on the things you want to sell here. You do the same with our chickens and stuff. Let's all get to keep a bit of what we're making for ourselves for a change."

I'd guess that there are lots of things governments in BRIC countries could do, fairly cheaply, to stimulate trade which routes around the current failures in the US and Europe.